Wednesday, February 25, 2009

LoJack Rides High

LoJack shares (LOJN) rose nearly 20% last week as the company issued an EPS outlook for 2009 that would give it a forward P/E of 9. The company, which makes products to track stolen vehicles, also showed a small profit in Q4 of 2008, despite historic lows in the auto industry. While the quick run-up in the share price may have been difficult to predict, LoJack had all the makings of a stock with a lot of upside with little downside.

The first thing to look for in a long-term investment is the company's ability to weather storms. Companies with strong liquid asset positions relative to debt stand a greater chance of outlasting recessions, and have the ability to steal share and make strategic investments while competitors focus on solvency. (For example, as an aside, LCA Vision (LCAV) in the Lasik procedure industry can pick and choose its most profitable centres, while competitor TLC Vision (TLCV) must exit businesses to pay off its hounding debt obligations.)

LoJack fares well in this regard, with a cash position over $60 million and a total debt position under $30 million. This allows it to make strategic investments to expand and diversify its business with little in the way of competition. It will soon come out with a product that leverages its existing technology infrastructure to find cargo, as well as mentally ill patients who have wandered off.

But all the liquid assets in the world won't help if a company is burning through its cash. But LoJack has a demonstrated ability to cut costs: despite the massive drop in auto sales, gross margin fell only 3 points from 53% to 50%. As we discussed, since the company farms out the manufacture of these units, these costs are mostly variable, which makes it easier to scale them down to accommodate a drop in sales. Furthermore, the company's fourth quarter modest profit demonstrates it is able to make these strategic investments while still maintaining its cash position!

While LOJN shares are not as cheap as they once were, they nevertheless may still represent great value for those with a long-term outlook.

Disclosure: Author has a long position in LOJN shares

4 comments:

Jae Jun said...

LOJN was a company that came up as I went through the Forbes best 200 small companies and I liked the way the business was run.

Unfortunately, I started looking at it a few days before earnings release and missed out on the nice pop.

Not enough margin of safety for me at its current price.

widemoatinvesting said...

They look to have nice free cash flow growth, though a relatively short operating history.

They've taken on some debt recently. Looks like interest coverage is fine, but do you know the structure? I'll check it out if I have the time to dig deeper.

Presumably they grew their product from nil, so I am curious how they got that market share. How does their product compare to competitors'?

Saj Karsan said...

Hi Wide,

The dynamic between LOJN's technology and its competitors is quite interesting. LOJN's 10-K is a great place to start your research.

commanderaugust said...

The thing about Lojack is that it doesn't directly compete with any products, but in the overall automobile security industry.

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